Europe faults Apple for 'anticompetitive' iPhone deals

Hamburg, Germany
— Apple's iPhone marketing has been a smash success at home, but it is running into stumbling blocks in Europe, where the touch-screen handset and music player is making its debut this month.

At issue are national laws that bar companies from "tying" products so that consumers have to buy one to get the other. The laws present a major challenge to Apple's global strategy of cutting an exclusive deal with mobile operators and taking a share of the profits from calling plans.

On Wednesday, T-Mobile, Germany's exclusive iPhone dealer, announced that it would offer the device without a contract to comply with an injunction issued by a Hamburg court last week – brought as the result of a lawsuit by mobile-phone giant Vodafone. Similarly, in France, where the iPhone goes on sale next week, Apple has been barred from requiring customers to sign up with the service provider Orange.

The iPhone conflict is another sign of the increasingly proactive approach European courts and government agencies are taking when it comes to regulating competition – a fact illustrated most vividly by the recent European Union court decision that forced Microsoft to unbundle its Media Player from its operating system.

"To the extent that their products reach a European market, American firms are going to have to watch their step," says Harry First, director of the trade regulation program at New York University School of Law. "Europeans are clearly getting bolder about proceeding against dominant firms."

Apple has already had its share of run-ins with European officials. Earlier this year, Norway outlawed the iTunes online music store, because the songs downloaded from the site can be played only using Apple products. Sweden, Finland, and Germany are also pushing to make iTunes music available on rival technologies. The European Union, meanwhile, is probing the iTunes pricing scheme, which it believes violates European law by preventing users from one country from buying music on sites elsewhere.

But the iPod product family, including iTunes, differs from the iPhone in one key way. While the new all-in-one device is undoubtedly a hit (Apple sold 1.4 million in the first 90 days alone) it doesn't dominate the cellphone market, as iPod does the MP3-player market.

"The big question raised by the current iPhone dilemma is whether preventing exclusive arrangements fosters competition in the absence of a monopoly," says Carole Handler, vice chairwoman of intellectual property litigation at Foley & Lardner LLP, an international law firm.

Vodafone, which had tried to secure a deal as Europe's sole iPhone provider, is interested in finding out. Spokesman Jens Kürten contends that part of his firm's goal in bringing the suit was to clarify the law.

"We want to have a clear court ruling on whether the conditions with which the iPhones are sold in Germany are in line with German law or not," he says. Vodafone, he notes, is interested in plumbing the legality of selling locked phones tied to a specific rate plan.

T-Mobile argues that no clarification is necessary. "Offering a phone coupled with a calling plan is a common practice in the industry," says spokeswoman Cornelia Rauchenberger. And it will save consumers a bundle: T-Mobile's new unrestricted phone option will cost €999 ($1,477), versus €399 (US$590) for a locked phone purchased with a two-year T-Mobile contract.

In the US, AT&T is the sole iPhone dealer, while O2 holds exclusive rights in Britain – which, unlike Germany and France, does not have antitying laws.

Editor's note:Due to an editing error, Vodafone's name was misspelled in the original version.